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FormFactor Inc  (NASDAQ:FORM)
Q3 2018 Earnings Conference Call
Oct. 31, 2018, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you, and welcome everyone to FormFactor's Third Quarter 2018 Earnings Conference Call. On today's call are Chief Executive Officer, Mike Slessor, and Chief Financial Officer, Shai Shahar.

Before we begin, Jason Cohen, the Company's General Counsel, will remind you of some important information.

Jason Cohen -- Vice President & General Counsel

Thank you.

Today the Company will be discussing GAAP P&L results and some important non-GAAP results intended to supplement your understanding of the Company's financials. Reconciliations of GAAP to non-GAAP measures and other financial information are available in the press releases issued today by the Company and on the Investor Relations section of our website.

Today's discussion contains forward-looking statements within the meaning of the federal securities laws. Examples of such forward-looking statements include those with respect to the projections of financial and business performance, future macroeconomic conditions, foreign exchange rates, business momentum, business seasonality, the anticipated demand for products, customer requirements, our future ability to produce and sell products, the development of future products and technologies and the assumptions upon which such statements are based. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call.

Information on risk factors and uncertainties is contained in our most recent filing on Form 10-K with the SEC for the fiscal year ended 2017 and our other SEC filings, which are available on the SEC's website at www.sec.gov and in our press release issued today. Forward-looking statements are made as of today, October 31, 2018, and we assume no obligation to update them.

With that, we will now turn the call over to FormFactor's CEO, Mike Slessor.

Michael D. Slessor -- Chief Executive Officer

Thanks, Jason, and thank you, everyone, for joining us today.

As we anticipated during last quarter's conference call, FormFactor delivered third quarter results comparable to our second quarter on the top and bottom lines. The expected gross margin reduction due to product mix was mostly offset by good operating expense control, enabling us to deliver non-GAAP earnings per share at the high end of our outlook. And, as you saw from our press release earlier today, we expect a modest sequential increase in fourth quarter revenue. Given the volatile industry backdrop in a quarter that is often seasonally weak, these healthy results and outlook are a direct demonstration of our leadership across attractive served markets in advanced probe cards and engineering systems.

A primary driver of our financial performance is the structural demand for FormFactor's products and technologies. As we described in the past, probe cards are a consumable that is specific to each and every new IC design. As a result, we benefit from both node transitions and the release of new designs on existing mature nodes. With the stalling of Moore's Law, our opportunities on mature nodes are especially important, providing demand even when new nodes are delayed, an event we saw twice with major customers this year.

Our third quarter results offer a strong example of this demand for probe cards on existing nodes as our largest customer released several new designs on their 14 nanometer node, which is now nearly five years old. This new design activity resulted in third quarter volumes that returned to the levels we delivered in the first half of 2017. And in the current quarter, we expect the strong 14 nanometer activity to continue.

We also benefit from node transitions, of course, and we expect to generate demand as our largest customer transitions to 10 nanometer production, an event which we continue to expect in 2019. More immediately, we are currently benefiting from other customers' node transitions in foundry and logic, with our fourth quarter outlook supported by initial 7 nanometer production volume at the world's leading foundry.

As we've discussed in the past, the cornerstone of this expanding relationship is FormFactor's proprietary MEMS-based probe technology and the differentiated advantages it provides, especially in advanced packaging applications like integrated fan-out. We will continue our R&D investments in MEMS-probe leadership to further differentiate and increase our share as more silicon is integrated using advanced packaging.

Turning to memory. Amidst a high degree of noise around customer investment plans, the third quarter saw sustained volumes of probe cards for both DRAM and flash applications. The three major DRAM manufacturers continue to exhibit slightly different node transition and design release cadences, helping to stabilize and smooth overall probe card demand from quarter to quarter.

In addition, our opportunistic flash strategy continued to pay dividends as we won several high-end designs where FormFactor's MEMS technology has a substantial performance and quality advantage over our competitors. Another exciting component of FormFactor's opportunity set is the broadening of our served application space through our engineering systems products.

As we've described previously, this business allows us to engage with customers in early development of the devices and technologies that will power tomorrow's electronics industry. Increasingly, these products are in the form of optoelectronic as the industry innovates in sensors, displays and other devices that rely on a combination of electrons and photons. Our team and products have been supporting development and initial production of such innovative devices as wixels (ph), micro-LED displays and silicon photonics.

In the silicon photonics application, we have partnered with the instrumentation leader Keysight to produce a turnkey integrated system that dramatically reduces the time to data for our customers, accelerating their time to market and increasing their profitability. Although still an emerging application, we are excited by the recent momentum in silicon photonics as evidenced by the expansion of our installed base in the quarter to more than 10 systems.

Consistent with the well-recognized weakening of customer investments in both DRAM and NAND flash, we expect memory probe card demand to reduce in the fourth quarter. As a reminder, our lead times are approximately half a quarter, so our visibility beyond that is limited, especially in the current environment. Accordingly, we continue to manage our business with the knowledge that we operate in a cyclical industry, relying on our broad and diversified opportunity set to generate demand while maintaining a disciplined and flexible approach to our cost structures.

The second half of 2018 offers some nice proof points of these. In particular, the fourth quarter strength in foundry and logic is expected to offset weaker memory demand, and paired with the operating expense control demonstrated in the third quarter, is combining to deliver solid profitability and cash flow.

In summary, we remain excited about our markets and our position in the industry, and are committed to achieving our target financial model. As the share leader in our served markets, we are not immune to short-term industry demand volatility. But we are demonstrating an ability to weather this volatility. Our engagements in early customer innovation and R&D through our engineering systems business, transitioning into production volumes with our consumables probe card business, is a powerful model that sets the stage for continued leadership, driven by growth in advanced packaging, mobile data and automotive applications.

With that, I'll hand the call over to Shai for further details on our third quarter and to provide insight into FormFactor's fourth quarter financial outlook.

Shai Shahar -- Chief Financial Officer

Thank you, Mike, and good afternoon.

As you saw from our press release and heard from Mike's comments, our third quarter results were comparable to our second quarter. FormFactor's revenues for the third quarter of 2018 were $135 million, basically flat with the second quarter.

Probe Cards segment revenues of $111.6 million and Systems segment revenues of $23.4 million were both comparable to the Q2 levels. Within the Probe Cards segment, we also saw very similar revenue levels in each of the markets we serve. Foundry and logic revenues of $61.2 million decreased less than 2% compared to our second quarter and were 45% of total Company revenues in the third quarter, slightly down from 46% in Q2.

DRAM revenues were $37.4 million in Q3, down $0.7 million or 1.8% sequentially. In both Q2 and Q3, we experienced sustained DRAM demand as our customers released new designs for data center and mobile application. DRAM revenues were 28% of total Company revenues in the third quarter, consistent with the second quarter.

Flash revenues of $13 million were $1.6 million higher than in the second quarter, a 14% increase. We continued to see stronger demand for our technology due to stringent test requirements for high layer count 3D NAND. We are being opportunistic and capitalizing on winning additional flash designs where we have a technology advantage. Approximately $8 million of the flash revenues in Q3 were from NAND flash applications. Looking ahead, we believe flash will be a single-digit percentage of our revenue in the mid and long term.

GAAP gross margin for the third quarter of 2018 was $53 million or 39.2% of revenues, down 2.3% compared to 41.5% in the second quarter. Similar to Q2, Q3 cost of revenues included $6 million of GAAP to non-GAAP reconciling items, which we outlined in the reconciliation table available on the Investor Relations section of our website and in our press release issued today.

On a non-GAAP basis, gross margin for the third quarter was $58.9 million or 43.7% of revenues, down 2.2% from the 45.9% in the second quarter and slightly above the midpoint of our outlook range. As a reminder, product and customer mix, including mix within the different markets we serve have the biggest impact on our gross margin, and the decrease in Q3 was primarily due to a less favorable product mix in the third quarter as compared to the second quarter.

Our Probe Cards segment gross margin was 42.7% in the third quarter, a decrease of 2.6% compared to Q2 due to the product mix factor I mentioned before. Our Q3 Systems segment gross margin was very similar to Q2 at 48.1%, 0.5% lower than Q2 on slightly lower revenues.

Our GAAP operating expenses were $43.6 million for the third quarter, $1.3 million lower than the second quarter. The third quarter operating expenses included $6.1 million of GAAP to non-GAAP reconciling items. Non-GAAP operating expenses for the third quarter were $37.5 million or 28% of revenue, down $2.1 million compared to Q2. The decrease is mainly due to employee-related costs, including lower performance-based compensation and benefits and disciplined spending.

Company non-cash expenses for the third quarter included $7.5 million for the amortization of intangible assets, $4.5 million for stock-based compensation and depreciation of $3.6 million. Amortization of intangible and stock-based compensation were both slightly higher than in the second quarter due to timing of annual stock grants and updates to the amortization schedule. The non-GAAP effective tax rate for the third quarter was 7.1%, similar to the 7.5% for the second quarter.

We entered 2018 with over $240 million of remaining US based NOLs. As such, we continue to expect to have a non-GAAP effective tax rate of 5% to 8%, while we utilize our US NOL.

GAAP net income was $7.7 million or $0.10 per fully diluted share for the third quarter compared to net income of $9.1 million or $0.12 per fully diluted share in Q2.Third quarter non-GAAP net income was $19.6 million or $0.26 per fully diluted share compared to $20.4 million or $0.27 per fully diluted share in Q2.

Moving on to the balance sheet and cash flow. We generated $13 million of free cash flow in the third quarter compared to $16.8 million in Q2, taking our total cash to $143 million at the end of the quarter. The $3.8 million decrease in free cash flow in Q3 as compared to Q2 is primarily due to an increase in inventory to meet Q4 customer demand. We spent $13.2 million on principal and interest payments on our term-loan during the quarter, including $5 million of prepayments. Going forward, we expect to repay the term loan principal based on the original amortization schedule.

Our total cash balance exceeded the balance of our debt by $71 million at quarter-end, an increase of $12 million. In line with our annual capital spending plan of $16 million to $20 million, we invested $3.8 million in capital expenditures during Q3.

Turning to the fourth quarter non-GAAP outlook. We expect Q4 revenue to be in the range of $132 million to $140 million and non-GAAP gross margins to be in the range of 42% to 45%. Non-GAAP earnings per fully diluted share is expected to be in the range of $0.23 to $0.29. A reconciliation of our GAAP to non-GAAP Q4 outlook is available on the Investor Relations section of our site and in our press release issued today.

With that, let's open the call to questions. Operator?

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from the line of Craig Ellis from B. Riley FBR. Your line is open.

Craig Ellis -- B. Riley FBR -- Analyst

Thank you for taking the question, and congratulations on the steady results in what was a very dynamic environment in the third quarter. Mike, I wanted to go back to your points on the foundry and logic business, and just see if I can dig into some of the details that we have coming up. So nice to see a strong performance from your US customer. The question is, since they've been public in August with their three-year road map with a late 2018 -- late 2019 and 2020 14 and 10 transition, what does that mean for that part of foundry and logic? Does that mean it should be steady from levels we're seeing in the back half of the year or is there an opportunity to grow that part of that business?

Michael D. Slessor -- Chief Executive Officer

Thanks for the question, Craig. Obviously, with that customer it's been a very volatile year starting with the 10-nanometer delay at the beginning of the year. As you've seen, we're pretty pleased with the growth of that business as they've transitioned some products onto 14-nanometer and generated probe card demand on these new designs. I think as you say the cadence is going forward of continued 14-nanometer designs and then transitioning much of the wafer start volume to 10-nanometer is something that the customer has been fairly transparent publicly about their plans in 2019. And we continue to stay very, very close from a planning perspective with them to make sure we're prepared to make that transition in lockstep with them. There may be some upside associated with a 10-nanometer transition. As we've discussed in the past, typically node transitions have higher test intensities. Given that the bulk of our volume right now is on 14-nanometer, there is some potential upside to 10-nanometer. But I want to caution people that it's also not purely additive. It's not going to be 10-nanometer on top of 14-nanometer. There will largely be a substitution factor there, with maybe a little more test intensity.

Craig Ellis -- B. Riley FBR -- Analyst

Got it. That's helpful. And then switching gears to Taiwan foundry, that's been a nice growth story for you. And it sounds like there's good 7-nanometer traction. That customer seems to have a growing customer base itself. So can you talk about the potential for that business as you look out over the next three to four quarters to provide growth? And what are the prospects that business can provide solid year-on-year growth in 2019 versus 2018?

Michael D. Slessor -- Chief Executive Officer

Yes. So -- you're absolutely right. That is one of the nice growth stories in our business in 2018. I think there's two components to it. First of all, our opportunity in serving this foundry is really associated with 10-nanometer, 7-nanometer and below, with a very strong growth vector around advanced packaging, in particular integrated fan-out. So as we see more of that foundry's wafer starts and more fabless customer designs moving to those nodes and the advanced packaging technologies, that grows the opportunity for us. We've said in the past we expect long-term this opportunity to be comparable to the business we have with our largest customer. And nothing we've seen so far has changed us -- changed our view on that. We continue to make good progress toward it. And I think you'll see us having gained share in 2018 over 2017 with that customer, growing the business and we expect in our planning to do the same thing in 2019 as we grow toward, again, the magnitude of business we have with our largest customer.

Craig Ellis -- B. Riley FBR -- Analyst

That's helpful. And then Shai, I'll flip it over to you with two clarifications. One, with respect to gross margin, it seems like gross margin is performing well. You've got certainly volume working more at your favor. Can you give us a sense for just the growth -- gross margin gives and takes in the fourth quarter? And sticking with the middle of the income statement, were there any one-time or special items in the meaningful decrease in the third quarter's operating expense? And is that an operating expense level that it is sustainable going forward? Thank you.

Shai Shahar -- Chief Financial Officer

Thanks for the, two question, I think, Craig. I'll start with gross margin. And so, as I said in my remarks and we've said before, mix is the biggest impact on our gross margin. And we saw that evident in the difference between Q2 and Q3 gross margin, and Q4 gross margin is expected to stay in the same level because of the changes of the mix. And that -- this has been consistent; no surprises there. When it comes to OpEx, we have communicated before a range of $36 million to $39 million of quarterly OpEx. We (inaudible) Q3 and Q4. No special one-time items that we saw. We continue to monitor our OpEx. We remain disciplined and we are keeping our expenses -- and that's our plan, to keep our expenses in line with our revenue going forward.

Craig Ellis -- B. Riley FBR -- Analyst

And thanks, gentlemen.

Shai Shahar -- Chief Financial Officer

Thanks, definitely.

Operator

Your next question comes from the line of Edgar Roesch from Sidoti & Company. Your line is open.

Edgar Roesch -- Sidoti & Company -- Analyst

Thanks, and I'll add my congrats on a very steady quarter. On that theme, I wanted to ask because your guidance implies you'd have kind of three quarters in a row right around the $135 million, $136 million if you use the midpoint for Q4. So wanted to ask if the pacing of revenues within the quarter also was pretty evenly distributed or if you saw any kind of falloff and then acceleration toward the end of the quarter or vice versa? Any color would be appreciated.

Michael D. Slessor -- Chief Executive Officer

Sure. Thanks, Ed. I think I'll start by summarizing that although the top line results, Q2 to Q3, to our midpoint view of Q4 are very similar, sort of this mid-130s stretching to $136 million in Q4 are very similar to each other, there are an awful lot of moving parts underneath there. In the fourth quarter, in particular, we're expecting to see a substantial shift from memory to foundry and logic, and inside each of the markets we serve, there is quite a bit of variability in between each customer and individual designs and some of the cadences they go through on even a week-to-week basis. So the ebbs and flows, both from a mix perspective and from a timing perspective, within the quarter are much more dynamic than the top line results would lead you to believe.

Edgar Roesch -- Sidoti & Company -- Analyst

Okay. I appreciate that. And then your business touches a lot of different aspects of the industry here, and I was just wondering if you could provide any kind of color on the issue of tariffs and whether you -- if you can even offer some general comments on any kind of changing (technical difficulty) modification that you're -- that you've borne witness to, maybe not in your own business, but that you would say you've seen as a result of some uncertainty around the tariff issue. Thanks.

Michael D. Slessor -- Chief Executive Officer

In particular, the tariff issue for us is pretty squarely focused, as I think it is for most people, on China. We've had a significant footprint in the region for more than a decade, and have been investing fairly heavily in that business as the indigenous Chinese semiconductor industry sort of bootstraps itself up especially in memory to full production. Just to benchmark people, it still typically represents less than 10% of our revenue in any given time period. But we do view it as most other suppliers in the space do as interesting (technical difficulty).

Edgar Roesch -- Sidoti & Company -- Analyst

Okay. And then one final question. Engineering systems revenues year-to-date are pretty flat year-over-year. The original intent seemed like that might be an interesting area to consolidate. I was wondering if the viewpoint on that -- on that industry is still pretty consistent and once you get your balance sheet where you want it, maybe could get a little more active on that front.

Michael D. Slessor -- Chief Executive Officer

Yes. Maybe. Ed, I don't know whether we had some technical difficulties there, but I wouldn't mind finishing my thought on the tariffs issue. We have seen --

Edgar Roesch -- Sidoti & Company -- Analyst

(multiple speakers).

Michael D. Slessor -- Chief Executive Officer

No -- no problem. We have seen a few discussions with -- mostly with suppliers, where we are importing from the region. I would say limited impact to our customer engagements at this point. But it's something we're monitoring and evaluating pretty closely because I think we, along with most suppliers operating in the global industry, have a hard time viewing this as being positive (technical difficulty) to the priority, we've talked about continuing to de-lever being a use of our capital. We applied essentially all of our free cash flow to de-levering in the third quarter. But we continue to be pretty active in prospecting and building an M&A funnel around the themes of electrical test and measurement in some of these emerging rosier markets. So I'd agree with you. I think there are some opportunities there. We're still in the prospecting phase, and debt reduction, de-levering still remains our top priority.

Operator

Our next question comes from the line of David Duley from Steelhead. Your line is open.

David Duley -- Steelhead -- Analyst

Thanks for taking my question. You mentioned that you've done well with a Taiwan foundry. But when we look at your breakout of results in the quarter geographically, Taiwan is down pretty strong. Could you just elaborate a little bit more on the timing of your business there? And as a follow-on, with a lot more people adopting 7-nanometers with that foundry than at 10-nanometers, would you expect that business to smooth out or be less first-half loaded?

Shai Shahar -- Chief Financial Officer

Yes.

Michael D. Slessor -- Chief Executive Officer

And I think the second part of your question hits on the core issue. Our historical, even through the middle part of 2018 engagement with this customer has been pretty focused and concentrated in essentially a handful of application processor projects. And part of what we're trying to convey about the fourth quarter is we see for the first time us having a significant fourth quarter contribution from that customer as we broaden the relationship -- as we generally gain market share there, but also as the relationship expands and we serve more customers and more designs, we do expect it to start to smooth out as we move through the fourth quarter and into 2019.

David Duley -- Steelhead -- Analyst

Excellent. And then did you have 10% customers during the quarter and what percentages were there?

Shai Shahar -- Chief Financial Officer

Yes. This is Shai. We had our largest customer, Intel, has --let me give you the percentage in a second -- at 24% in the quarter and Micron was number two this quarter at 12%.

David Duley -- Steelhead -- Analyst

Excellent. And then the flash revenue that you're capturing now and that you've seen growth in versus last year, I think you mentioned it had to do with higher layer counts. Would you expect your flash revenue to perhaps ramp up with 96 layer flash parts or is that -- is there some correlation between this or what is the driver to this business to grow further? Thank you.

Michael D. Slessor -- Chief Executive Officer

Yes, it's a very good question, David, and one that we debate a lot internally. Certainly our flash business to date as we've opportunistically gone after designs and parts of the market where we really have a differentiated advantage, have been pretty strongly correlated to higher layer counts. They've also been correlated pretty strongly to higher densities and higher test speeds associated with certain customers and their test strategies. So I'm not sure I'd draw a one-to-one correlation between 96 layer flash and form factor (ph) flash growth. I think it's one of the components that certainly helps us as it drives that complexity in the required performance at the wafer test step where we participate.

David Duley -- Steelhead -- Analyst

And I guess one final question from me is along those same lines. It sounds like not only the higher layer counts help but that these flash parts have higher speed, so longer test times. And so my question is, do you see an increase in test time intensity with these flash parts? And maybe you could share with us what that increase in intensity is. And then just to double-check, in the past I think you've mentioned that advanced packaging such as in-fill (ph) are roughly 20% or 25% more test intensive and probe card intensive. I was wondering if that is still the view or if that's the accurate view. Thank you.

Michael D. Slessor -- Chief Executive Officer

Sure. So generally on -- test intensity and test time increase is associated with different things. It's a pretty complicated function, a whole bunch of variables, not the least of which is what the yield of the native die are. I think the ballpark estimate associated with advanced packaging being 20%, 25% more test intensive than, if you like, a plane silicon die, I think, is a reasonable estimate, and that's been triangulated by I think a couple of other test suppliers as well. 3D NAND is a little bit more complicated because it goes to the yield ramps, the layer counts and then of course the individual architectural decisions that each of the customers are making and their test strategies, where they choose to spend their test dollars, whether it be a wafer test or final test. So that one's a little more variable. It does seem to be more test intensive as you go up in layers and certainly as we see die stacking in advanced packaging moving into some of the regions of nonvolatile memory that offers the opportunity associated with advanced packaging as well.

David Duley -- Steelhead -- Analyst

Thank you.

Michael D. Slessor -- Chief Executive Officer

Thanks, David.

Operator

(Operator Instructions) Your next question comes from the line of Patrick Ho from Stifel. Your line is open.

Patrick Ho -- Stifel -- Analyst

Thank you very much, and congrats on the nice quarter and outlook. Mike, maybe as a follow-up to Dave's comments about test intensity on the memory side, if we can look at DRAM for a second. Obviously, the industry is undergoing a lot of node transitions, which helps you on the design phase, but talking to people in the industry, test intensity for DRAM is also becoming higher with the higher speeds and bandwidth and things of that nature. Can you comment on how that potentially can increase I guess the market opportunity, especially in the near term as you're going through several node transitions in the industry?

Michael D. Slessor -- Chief Executive Officer

Yes. So similar theme to the last question as you know that, Patrick. I think DRAM, because of the node transitions that all the major customers are going through, we do see generally the test intensity going up there. Anytime there's a move to a new node, higher densities and higher speeds this does demand increased test intensity to make sure customers are resolving their yield challenges and ramping effectively. That's part of FormFactor's value proposition for them. I think the other thing I'd like to highlight though in DRAM is a theme that you've seen in our DRAM business in 2018. And that's high bandwidth memory, which is one of these advanced packaging applications. Each of those die as we've discussed in the past, that goes into the stack die HBM or high bandwidth memory package, requires significantly higher test intensity essentially to make sure that it doesn't kill its neighbors in the stack. And so that's one of the other big drivers associated with test intensity in DRAM is the innovation associated with advanced packaging like HBM driving the need to ensure maybe not quite known good die but pretty good, pretty close to known good die.

Patrick Ho -- Stifel -- Analyst

Great, that's helpful. And maybe going to be engineering systems business for a bit, there is I guess multiple applications and multiple products, which you have, whether it's on-wafer, advanced packaging. Is it any one of those segments or any one of those segments I guess outperforming in the near term? Are you seeing more advanced packaging applications more so than the others or is it pretty balanced?

Michael D. Slessor -- Chief Executive Officer

I think overall what we're seeing is something I tried to convey in the prepared remarks. A lot of our engineering systems business, both the interaction with customers and the development in shipment of systems, is really starting to shift toward photonics applications, whether they be sensors like wixel or CMOS image sensors, some of the stuff we're doing with next-generation displays like micro-LED, we're seeing that would be a fairly strong segment, both from an activity perspective but also from a business perspective. It's starting to impact our results in a pretty significant way, which is why we try to draw attention to it, in particular the silicon photonics example driving an installed base now of more than 10 systems, which for an engineering business is a significant footprint worldwide.

Patrick Ho -- Stifel -- Analyst

Great. And final question, maybe for Shai, in terms of the free cash flow and CapEx needs. Given that where -- a few -- a couple of years from the Cascade Microtech deal, as your free cash continues to grow, I guess what are some of the priorities? Is there a need to increase CapEx as some of your product and markets grow, where are we looking at putting that cash to use?

Shai Shahar -- Chief Financial Officer

So specifically about CapEx, our plan in the last couple of years and going forward will be to invest between $16 million to $20 million a year on capital expenditures. I see ourselves staying in that range next year as well. And regarding capital, how we deploy our cash, we said before. Our first priority is to de-leverage our balance sheet and repay the loan. We've been prepaying our loan in the last few quarters. Q3 of '18 will be the last quarter we're going to do advanced prepayments on the loan. Going forward, we are going back to the original amortization schedule. And moving into our second priority, which is to expand our SAM (ph) through an M&A as Mike discussed before. We believe it can create more value to our shareholders.

Patrick Ho -- Stifel -- Analyst

Great. Thank you.

Operator

Your next question comes from the line of Christian Schwab from Craig-Hallum. Your line is open.

Tyler Burmeister -- Craig-Hallum -- Analyst

This is Tyler on for Christian. Congrats on the quarter and thanks for letting me ask a couple of questions. So first, your largest customer moving to 10-nanometer, as you spoke about, their timeline has been pretty well transparent. But I was just wondering if you could remind us what's the timeline for your business in relation to that customer's 10-nanometer products?

Michael D. Slessor -- Chief Executive Officer

Sure. Thanks, Tyler. Well, I mean, as we've said about this node transition and the transition to 10-nanometer -- historical comparisons have led us astray a couple of times. But if I do rely on some of the historical node transitions we've been through as a four generation supplier with this customer, typically I'd expect us to lead their broad market launch of products by a quarter or two, maybe three. So we see this, put a different way, as long as they stay on track with the late 2019 production release they've talked about publicly, we see this probably being a mid-2019 event, where you'll start to see significant activity for us. Now that's true more generally throughout much of our customer base. There are some projects in RF that have shorter cycle times or lead times between probe card delivery and customer shipment, but by and large you will see us -- our business leading our customer product releases by a quarter or two, sometimes three.

Tyler Burmeister -- Craig-Hallum -- Analyst

Great. And then a second one on the memory side, the DRAM side. This quarter your DRAM business is pretty stable. I believe you guys noted due to largely due to some new devices. So I was just wondering as we go into this next year and memory customers make the transition to this next node, how -- what's the magnitude of that or what's the expected magnitude that of the DRAM business versus normal new devices on the current node?

Michael D. Slessor -- Chief Executive Officer

Well, that's also a situation that's been pretty dynamic over 2018 and even over the last couple of years. It used to be four, five years ago that our business was purely driven by node transitions. But as nodes of -- as shrinks have gotten tougher as node transitions have been drawn out, we tried to draw peoples' attention to the fact that we also derive significant demand from new designs on existing nodes. And currently there's a awful lot of our DRAM revenue that's supporting new designs on existing nodes. I think if we expect that some of the node transitions to things like 1Y in the first part of 2019, maybe the first half of 2019, I think those will be events that probably cause a little bit of growth in our DRAM business off the fourth quarter levels. Again, reminding you that we're seeing a little bit of weakness off the third quarter levels going to fourth quarter in our DRAM probe card demand. If see those node transitions kick in, I think you could see it come back up to the Q2, Q3 levels.

Tyler Burmeister -- Craig-Hallum -- Analyst

Great. Thank you. That's all for me.

Operator

Your next question comes from the line of Craig Ellis from B Riley FBR. Your line is open.

Craig Ellis -- B. Riley FBR -- Analyst

Thanks for taking the follow-up question. Mike, I just wanted to cycle back. You've touched a number of times in different comments on the automotive opportunity in mobility and advanced packaging. But I just wanted to go back to the $130 million opportunity that you see longer term there. And can you just catch us up on where you think the Company is in terms of harvesting some of the growth that exists in those three areas?

Michael D. Slessor -- Chief Executive Officer

Sure. So to get everybody on the same page, we've talked about these three components, advanced packaging, mobile data and automotive as essentially being the constituent growth drivers that get us to our target model, which delivers $650 million on the top line and $1.50 of non-GAAP earnings per share. As I break down the three of those, I think far and away the leader from our perspective in executing against those opportunities in advanced packaging, whether it be HBM, in-memory, which we've talked about previously in a little bit on this call or integrated fan-out, which is one of the key drivers for our expanding foundry business at 10-nanometer and 7-nanometer, advanced packaging would probably lie two-thirds, three-quarters of the way there to achieving the opportunity that we laid out. But we see more headroom beyond that with advanced packaging. This is a very exciting trend for us. Mobility -- with the pullback in handset growth over the past year or so, anybody who follows the industry knows that I think RF components growth has slowed a little bit. But I think that's offset, going forward, especially here in 2019 by some really exciting 5G projects. We're working now on First Silicon, with all the leaders in the industry, as they build not just the filters but the modems and some of the 5G unique beam steering silicon that's really going to be part of what gives 5G the inherent advantages. So we're still probably early in our achievements of the incremental mobile demand. And automotive, I know there's been customers talking about the weakening of that market, continues to be pretty steady Eddie (ph) for us. A business that's not growing as fast as the other two opportunities in advanced packaging and mobile data. But we continue to see some solid performance out of that.

Craig Ellis -- B. Riley FBR -- Analyst

That's a real helpful summary. And Shai, maybe I can just get your commentary. I don't -- as we look at the target gross margin level of 46%, how can we think about bridging the gap between where we are today with gross margins around 43.5% up to another 250 basis points to 46%, if we broke that down into three or four buckets, how do we get from where we are now to 46%?

Shai Shahar -- Chief Financial Officer

So first, I want to remind you that thing. Prior quarter, we had reached 45.9%, right, so -- of gross margin. So that was a great -- indicated for us that we can reach that target model. And we -- one of the things that will impact improving our gross margin as a target model is of course the volume. $650 million, we can achieve then more leverage and that will contribute to the increase. And mix, as I mentioned before, will continue to have a big impact on our business. And operational execution is also something that we focus a lot on improving yields in our factories. And we think we can also achieve more and more leverage by cost initiative that we're taking, with our Companywide initiatives such as ERP integration that we made our progress this year and we're going to continue to invest in next year, plus specific BU initiatives, cost reductions in specific areas.

Craig Ellis -- B. Riley FBR -- Analyst

Thanks, guys.

Michael D. Slessor -- Chief Executive Officer

Thanks, Craig.

Operator

I am showing no further questions at this time. I would now like to turn the conference back to Mike Slessor.

Michael D. Slessor -- Chief Executive Officer

Great. Thank you everyone for joining today, and we'll talk to you again in the quarter.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 45 minutes

Call participants:

Jason Cohen -- Vice President & General Counsel

Michael D. Slessor -- Chief Executive Officer

Shai Shahar -- Chief Financial Officer

Craig Ellis -- B. Riley FBR -- Analyst

Edgar Roesch -- Sidoti & Company -- Analyst

David Duley -- Steelhead -- Analyst

Patrick Ho -- Stifel -- Analyst

Tyler Burmeister -- Craig-Hallum -- Analyst

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